Congress Asked To Resolve Accounting Discord

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The credit union lobby will ask Congress this week to resolve an emerging conflict over new accounting rules that, when finalized, could have the effect of discouraging credit union mergers.

Witnesses representing both NAFCU and CUNA, with the agreement of NCUA, will urge the Senate Banking Committee during hearings on regulatory relief, to allow credit unions to continue aggregating their net capital after a merger and counting the capital from both institutions after completion of the merger, although they would account for the rest of the merger under the required purchase method of accounting.

Otherwise, a new rule being finalized by the Financial Accounting Standards Board will require that credit unions, like publicly traded entities, adopt the so-called purchase method of accounting, preventing them from counting the capital of both CUs in the new entity. This would act as a disincentive to credit union mergers because it would vastly dilute the capital ratio of the surviving credit union, according to Bill Donovan, chief lobbyist for NAFCU, who has been working on the issue for the past year. This could cause some credit unions brush up against NCUA's minimum net capital standards under prompt corrective action, said Donovan.

Both NAFCU and CUNA will urge the Senate to amend the Federal CU Act to specify that CUs may count the combined retained earnings of both institutions as net worth (capital) after completion of a merger. "This is an issue that clearly calls for an action by Congress, for a remedy, if FASB acts as expected," said Donovan.

The FASB is expected to extend the requirement to adopt the purchase method of merger accounting for credit unions sometime in the third quarter and to make it effective starting next year.

The timing could be problematic for credit unions because Congress is very unlikely to pass a regulatory relief bill this year. That means credit unions would need to get such a provision included in some other bill in time for passage of the new rule.

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